Earlier this year, the investing world was abuzz with potential changes to taxes laid out in President Biden’s multi-trillion-dollar spending plan. For investors, the most dramatic item was the proposal that long-term capital gains get taxed at the same rate as ordinary income for high earners.
Those plans have changed considerably. As we’ve mentioned before, when it comes to political proceedings, it’s useful to use the words “potential” and “proposed” quite a bit.
The update before the Update
However, we are now likely marching toward a resolution, with the finalized results probably coming anywhere between now and early next year. Here’s a quick summary of where the latest proposals stand:
What may change:
- For earners above $10 million a year, there may be a 5% surcharge on modified adjusted gross income, and an additional 3% surcharge on modified adjusted gross income that exceeds $25 million (both figures are for married couples filing jointly)
- For high-income taxpayers, a 3.8% Medicare surtax would apply to income from pass-through businesses
- High-income taxpayers with large retirement account balances would face new rules and limitations on contributions, required minimum distributions, and Roth conversions
- Backdoor Roth conversions would be eliminated
- The state and local tax deduction cap would be increased from $10,000 to $80,000 (figure for married couples filing jointly)
What is now missing from the proposals (and the list is long):
- Increase in the top ordinary income tax rate (though previously scheduled increases may start in 2026)
- Increase in the top capital gains tax rate
- Decrease in the gift and estate tax exemption
- Modification of the rules for carried interests
- Changes to the grantor trust rules
- Billionaire “mark to market” tax regime
The bottom line
For most investors, the tax provisions included in this framework are less severe than those in prior tax proposals.
However, the tax legislative environment remains extremely fluid, and additional amendments to the legislation may be made. Tax proposals, including several of those noted above, now excluded from this framework could still be added, so we’ll be monitoring the legislative process along with investors.
In the meantime, taking a tax-conscious approach to wealth management is always recommended. No matter how the proposals shake out, understanding the importance of asset location may be key.
Check back here on www.blackrock.com/intheknow for updates.
If you are a financial professional, reach out to your local BlackRock market team to see how you can partner with BlackRock and Aperio to build and manage portfolios that reflect your clients’ unique tax considerations.
